TORONTO (miningweekly.com) – TSX-V-listed gold juniors Aquila Resources Inc and REBgold on Thursday announced a definitive agreement to combine their businesses, after which the merged entity would buy the remaining 51% interest from Hudbay Resources in the Back Forty gold/zinc project, located in Menominee county, Michigan.

Under the agreement, Aquila would acquire all the outstanding shares of REBgold, in exchange for Aquila shares on a one-for-one basis.

Aquila and REBgold also said they intended to complete a nonbrokered financing through a nonbrokered private placement of up to $6-million, at a price of $0.13 a share.

Aquila CEO Barry Hildred told Mining Weekly Online in a telephone interview that the complex deal announced on Thursday was an embodiment of the current market situation, in that it involved a mining major disposing of a good asset that did not fit its current strategic vision, a merger in the junior sector, which many analysts were expecting, and a specialist industry investor supporting the project financially.

The financing would be structured as a sale of REBgold common shares, which would be issued immediately before closing the business combination, at which time, shares would be exchanged for Aquila shares.

The companies announced that UK-based Baker Steel Capital Managers, which manages about $540-million of assets on behalf of a broad range of financial institutions, wealth managers and professional investors, had committed to buy $4.5-million of REBgold shares under the financing.

Completing the financing would be contingent on the companies concurrently completing the merger, and closing the Back Forty acquisition, among other required approvals.

Diversified miner Hudbay has agreed to sell its 51% interest in the Back Forty project to the merged company, which for the time being would continue to operate as Aquila, for $2.25-million, consisting of up to a maximum of $2.5-million Aquila common shares, based on 50% of the financing, which would be issued upon closing of the Back Forty acquisition; and up to $9-million in post-closing milestone payments tied to development of the project.

These payments would entail $3-million payable upon completing any form of financing to start construction of the mine, of which up to half could be payable, at Aquila's option, in shares with the balance payable in cash; $2-million in cash payable 90 days after the start of commercial production; $2-million in cash payable 270 days after starting commercial production; $2-million in cash 450 days after starting commercial production; and a 1% net smelter return (NSR) royalty on production from certain land parcels on the Back Forty property, capped at $7-million.

"We fully support this transaction as it allows us to focus on our core strategy while maintaining the ability to participate in the potential upside at Back Forty through our increased equity holding in an invigorated Aquila," Hudbay CEO David Garofalo said in a statement.

The terms of the agreement provided that if Hudbay had not received any milestone payments or received at least $2.5-million in proceeds from selling the Aquila shares it would receive on closing, within ten years, it would have the right to repurchase a 51% interest in the Back Forty project in exchange for its initial consideration shares or $2.5-million in cash.

REBgold chairperson Mark Burridge added that the merged company would start working on a prefeasibility study in the first half of 2014, concurrently with starting the permitting process.

“Lots of work has already been done, this could be seen as the project merely resuming, and activities will from here onward only ramp up,” Burridge said.

RESOURCE ESTIMATE

The Back Forty project is an advanced-staged exploration project delineating a zinc- and gold-rich volcanogenic massive sulphide deposit located within the Penokean volcanic belt. Over the past ten years, Aquila and various joint venture (JV) partners had spent more than $50-million exploring and advancing the Back Forty project.

As of July 3, 2012, HudBay had decided to suspend funding for the JV; however, the JV published an updated Canadian National Instrument (NI) 43-101 resource estimate that included 78 new drill holes, on February 4, which followed up on a positive preliminary economic assessment (PEA) completed in April 2012.

The project currently holds 15.1-million tons in the measured and indicated categories, and 2.3-million tons of inferred resources.

The updated measured and indicated resource estimate contained 987 236 oz of gold, 11.91-million ounces of silver, 1.02-billion pounds of zinc, 74.3-million pounds of lead and 110.4-million pounds of copper. The inferred category also held an estimated 155 885 oz of gold, 1.99-million ounces of silver, 113.3-million pounds of zinc, 17.2-million pounds of lead and 18.6-million pounds of copper.

The PEA had concluded that at a base-case gold price of $1 332/oz, the Back Forty project had a pretax cash flow of $211.8-million, a pretax net present value, including an 8% discount, of $73.6-million, and an internal rate of return of 18.2%.

The project would cost about $224.7-million to build and would require about $47.6-million in operating capital throughout its expected seven-year mine life.

Over the project’s life, it was expected to produce 77 200 t of copper concentrate, 323 500 t of zinc concentrate, 295 300 oz of gold and 2.6-million ounces of silver contained in gold-silver alloy dore and within the copper concentrate.

The average unit operating costs were expected to total about $36.79/t mined and processed over the life of the project.